Delaware Trade Secret Law

How does Delaware law protect your company's trade secrets?

Many Delaware companies rely on various forms of proprietary information as a core part of their business. They want to protect trade secrets such as their customer lists, sensitive marketing information, non-patented inventions, software, formulas and recipes, techniques, processes, and other knowledge that gives them a business edge. How do Delaware's laws help to safeguard such trade secrets?

In legal terms, information is more likely to be considered a trade secret if it is:

not known outside of the particular business entity

known only by employees and others involved in the business

subject to reasonable measures to guard the secrecy of the information

valuable, and

difficult for others to properly acquire or independently duplicate.

Protecting Trade Secrets in Delaware Using NDAs

Before even considering applicable statutes, many Delaware businesses will attempt to protect their trade secrets by the use of nondisclosure agreements (NDAs). NDAs are essentially private contracts in which the employee promises not to disclose certain information learned while working for the current employer to any future employer.

For example, imagine that you own a manufacturing plant in Wilmington. You have developed certain production methods that give you a competitive advantage, allowing your company to produce at greater efficiency than other similar plants. You require that your employees sign an NDA, so that if they leave for a competitor, they are contractually obligated to not share the information about your manufacturing process that they learned while working for you.

If you believe that an employee has violated the obligations described under the NDA, you can sue for breach of contract. This threat of litigation is often enough to prevent employees from stealing trade secrets.

Misappropriation of Trade Secrets in Delaware

Delaware's statute defines a trade secret as "information, including a formula, pattern, compilation, program, device, method, technique or process, that: (a). Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b). Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

Delaware’s version of the UTSA refers to the theft of trade secrets as misappropriation. Under Delaware law, "misappropriation" is the acquisition of a trade secret by someone who knows or has reason to know that the trade secret was acquired by improper means, such as theft, bribery, misrepresentation, or breach of or inducement of a breach of duty to maintain secrecy. It also includes the disclosure or use of a trade secret without consent by someone who used improper means to acquire knowledge of the trade secret, for example, an ex-employee who spills company secrets to a rival.

Delaware's "Reason to Know" Standard

Delaware prohibits use of trade secrets by a company that has “has reason to know” that the material constitutes a trade secret. This is known as constructive knowledge (versus actual knowledge). In other words, even if a Delaware company was unaware it possessed purloined trade secrets, it can still be prosecuted under Delaware law if it should have known.

Penalties for Misappropriation in Delaware

Under Delaware law, a trade secret thief can be prevented from disclosure by court order, known as an injunction. This is true for both actual or threatened misappropriation. The court may order that the injunction be continued for as long as necessary "in order to eliminate commercial advantage that otherwise would be derived from the misappropriation." In exceptional circumstances, Delaware law also allows the court to condition an injunction upon payment of a reasonable royalty to the trade secret's owner.

A victim of trade secret theft can also seek financial compensation that measures the actual loss attributed to the theft or the profits (or “unjust enrichment”) acquired by the trade secret thief. Under Del. Code Ann. Title 6 Sec. 2003, monetary damages may include "both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss." In egregious situations, a Delaware court can award punitive damages, up to twice the amount of any award, It can also award attorney's fees to the trade secret owner.

Statute of Limitations in Delaware

Under Del. Code Ann. Title 6 Sec. 2006, an action for misappropriation must be brought within three years "after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered." Consequently, if you believe that a trade secret has been stolen from your company, you should move with alacrity to retain an attorney, or else you may risk being time-barred.

Federal Law on Trade Secrets

In addition to Delaware’s laws regarding trade secrets, certain federal rules also apply in Delaware. The Economic Espionage Act of 1996 makes the theft of trade secrets a federal crime. The Act prohibits the theft of a trade secret by a person intending to or knowing that the offense will injure a trade secret owner.

The Act also makes it a federal crime to receive, buy, or possess trade secret information knowing it to have been stolen. The Act’s definition of “trade secret” is similar to that of the Uniform Trade Secrets Act.

The penalties for a violation of this statute include a potential prison term of 15 years and fines up to $5 million, depending on whether the defendant is an individual or a corporation. A private party can still sue for trade secret theft even if the federal government files a criminal case under the Economic Espionage Act.